The Ascent of Advice

Consumer demand and the emergence of new services and products have elevated advice-giving over the past 25 years. Trading costs came under intense scrutiny as discounters showed what a transaction was truly worth. In 1975, the Dow Jones Industrial average hovered around 800, the Nasdaq composite finished the year under 100, and the mutual fund industry was barely hanging on with total assets of $50

Consumer demand and the emergence of new services and products have elevated advice-giving over the past 25 years.

Trading costs came under intense scrutiny as discounters showed what a transaction was truly worth.

In 1975, the Dow Jones Industrial average hovered around 800, the Nasdaq composite finished the year under 100, and the mutual fund industry was barely hanging on with total assets of $50 million.

To top off the bad news, commission rates were unfixed as of May 1, 1975. Many leaders on Wall Street predicted even tougher times when competition impacted the industry's high commissions. Factor in that investors were soon to enjoy a growing stream of financial information and do-it-yourself tools and products, and it's no wonder some were questioning the survival of “full price” brokers.

But in the trenches a new way of thinking was taking hold among brokers. Consumers faced more complicated situations and wanted an adviser who understood them. Dissatisfaction with the sales culture sparked the emergence of the financial planning movement. Innovations such as fee accounts and money markets allowed the historically transaction-based broker-client relationship to become more advisory in nature.

“The role of the broker has changed from being a stock picker to being an organizer of assets who creates a plan and helps his clients succeed,” says Ellsworth Davis, a UBS PaineWebber rep in New London, Conn.

Another veteran broker, James Gueydan, an 84-year-old rep with Legg Mason in Houma, La., agrees: “We were forced to go from touting the hot stock, quick-buck, short-term trend to providing total financial planning for the long term.”

Why? For one thing, the consumer movement increased expectations of professionalism and customer service. It's no secret that people get turned off by “brokers, bankers or insurance salesmen,” says Gib Kerr, a CFP in Sherman Oaks, Calif., affiliated with Aragon Financial Services.

Meanwhile, trading costs came under intense scrutiny as discounters showed what a transaction was truly worth. And with the growing availability of financial information, brokers had little value as simply being the source for quotes, news and analyst opinions.

The transactional business had to change. True full service required more in the way of financial planning and investment consulting services.

The Industry Shifts

Today there are more than 37,000 CFPs — many of them brokers — compared with only about 500 in 1976. Wall Street took some time to embrace the idea of planning, but finally got there. For years, Merrill Lynch did not permit brokers to include the CFP mark on their business cards. Today, a planning designation is mandatory for veteran Merrill producers to enjoy full benefits.

Handling investments on an investment advisory basis and charging an asset-based fee for the service has been a significant change, brokers say. EF Hutton's rollout of the first wrap-fee account in 1975 is the obvious milestone, followed by the proliferation of trail fees and fee-based non-discretionary brokerage accounts. The key benefit of fees is more time for consultation.

“The role of the broker has changed from being a stock picker to being an organizer of assets who creates a plan.” — Ellsworth Davis, UBS PaineWebber

“Looking at clients' financial plans or portfolios can take a lot of time,” Gueydan says. “You can determine that no change is necessary. Under a fee-based agreement I get paid to make those decisions — that's advice.”

Gary Fry, a Merrill rep in Dallas for the past 22 years, explains his style: “I talk to clients about their needs, their risk tolerances, time horizons, what they want and then create an investment policy. [Consultative selling] is a much better way of doing business. It's more coherent and more structured. … Clients and brokers end up ahead this way, compared with the old transactional approach.”

Even the discounters and no-load funds have come to realize that most customers want some level of guidance and direction. For example, Schwab has built more self-help tools over the years and last year began offering recommendations to discount customers. In addition, Schwab will introduce a new advertising campaign later this year emphasizing its advisory services. And since 1985, the firm has built a huge business serving independent retail advisers.

Meanwhile, the market share of no-loads peaked at around 35% in the early 1990s, but now it's around just 20%. Today, few fund complexes rely strictly on a direct sales model.

Going Forward

Reps have worked hard for their increased share of the business and must continue to develop their advice-giving techniques.

“Brokers' roles have changed so much,” Gueydan says. “We have to study longer and harder to understand what the public is reading and where it's coming from. A broker has to do his homework and maintain his integrity to attract clients.”

A 39-year veteran, Bill Saunders with First Union Securities in Hampton, Va., has this advice for young brokers: Study financial planning. The days when reps were content to pour over balance sheets and stock charts are gone.

“There is going to be a need [for estate planning] because the generation that went through the Depression and World War II, and knows the value of a dollar is about to pass trillions on to the feel-good, instant-gratification generation,” Saunders says.

He relates a story of how important advice is — or should be — to today's clients.

“There has been a rash of people in the recent, hot years picking their own stocks,” Saunders says. “One guy really took a huge hit in tech stocks and was ready to sell. When I told him the average P/E ratio in his portfolio was 75, he said, ‘What's that?’ That's when I knew he had no clue what he was doing.”

Twenty-five years ago, a client like this might not have been so impulsive. He most likely would have worked for a salary, never given much thought to his defined benefit plan and purchased some stocks strictly through a full-service broker.

Today he is compensated in part with equity in his employer, defers his own money into a 401(k) he can see anytime, and can't avoid the financial news and the cash inducements to open online trading accounts. He is probably better informed, but still unable to deal completely with the complexity and emotions of investing.

Gueydan sums up his experience over the past few decades: “I dispense knowledge and experience so investors won't hurt themselves.”